Real Estate Investments, Trends and Cycles. Is there something we are missing?

Just two decades ago, no one in India really wanted to live in an apartment. A piece of land, no matter how small was purchased and a home was built there, over time. The place sort of evolved as its owners grew, prospered, went around and brought back know-how, design ideas and articles to build their nests. Then one fine morning, everyone started buying apartments. Some time later, everyone started buying fully furnished apartments. What could be next?

Why the world will run out of Tequila and what does that have to do with my real estate investment?

There is truth behind that logic after all, read on. . .

The Tequila Crisis

Thanks to our amazing shortsightedness as a race, we almost wiped Tequila off the bar at home! Mexico's blue agave yield (the plant tequila comes from) is in terrible short supply now. Back in 2007, 20% of the crop was crippled by disease, a sign that proved that farmers were turning their backs on their blue agave crops for the same reason cocoa farmers are fading fast: cost.

Growing corn was far more lucrative than blue agave. So what does a farmer do when he wants to replace his blue agave with a cash crop? He simply burns it and replaces it with corn. Farmers need to make money too. Only in the year 2000, The Guardian published this article - Shortage of agave gives Mexico's tequila makers the blues but such lessons, as is evident here, are forgotten easily. 

Cut back to now, this is what Gizmodo says about the upcoming Tequila crisis - "But don't start drowning your sorrows just yet; major producers have been carefully storing away tequila for the upcoming shortage. Because when it finally does hit, that gold liquid will turn into liquid gold, which isn't great for the consumer, sure. But as independent farmers see blue agave start rising in value, they'll start replanting those same fields they previously set in flames [IREFD Insert - Farmers are really stupid people].

Of course, once that does happen, it takes about 12 years for a blue agave plant to be able to actually produce the fructose necessary to make tequila. Better stock up while you still can..."

A thought on Real Estate Investment Trends and Cycles

Is the farmer wrong, when he decides to replace a crop no one wants to buy with a more saleable crop? Hardly. Supply is completely determined by demand. When corn is in demand, corn is what you get. To hell with the future!

In the year 2001, when I was a front line real estate salesman, I sold 1050 Sq ft 2 BHK apartments with a 33% super built up loading in a project called Hiland Park. You can imagine how cramped a 700 Sq ft Built Up Area (about 550 Sq ft carpet area only I guess) apartment must be. But FYI, out of 950 odd apartments that were being built, each and every one of them were sold, to the upper echelons of Kolkata's business and professional circles. The Calcutta Metropolitan Group built Hiland Park because that is what the people wanted back in the year 2000. It was a mindless answer to demand. To hell with the future!

The first lot of customers, @Rs. 1250 per Sq ft paid almost 15 lacs for their 2 BHK apartment in Hiland Park. At today's rates, 13 years down the line, the asking rates are Rs. 5000 per Sq ft and above. But in a project of 950 apartment units, are there really any true values? Most real estate investors and end users will be blinded by the 1250 to 5000+ rise in value. Optimistic friendly banter conversation in the resident's club will throw up even higher figures!

Some things to note and think about

Would you spend 60 lacs (12 lacs down payment and a 50 thousand EMI for 20 years!) to buy a 550 Sq ft house in Hiland Park today?

Would you pay 60 lacs to own something that was constructed and finished at levels, far below what you are paying for, today?

Do you really know anyone who actually spend 3 crores to buy a 3 BHK apartment on the 4th floor instead of building a real home for half that money? But then, what is a real home? Sigh.

People. The builder is like the Mexican farmer, who is just like the people who build Kodak films. They build what is trending. Because what is trending, sells.

So here is something unsettling, that I ask myself on some nights. Are we really making sensible, long term real estate investments? Do we expect real, sustainable returns from our assets? Or, are we simply buying into the trend, fueling a dangerous short term cycle? 

As I write this, 2 BHK homes below Rs. 40 Lacs continue to sell across the country. Indian cities that didn't believe in anything below 3 BHK luxury apartments are suddenly thinking things like 'low ticket size' and affordable housing. And that one generally wakes up the mother ship of all questions. Is all that real estate out there, not selling because the trend has changed?

Has the current generation, having learnt a great deal from our failures, become more sensible and frugal? As we progress as a race, will we not hate such waste, which we now call luxury? And then all this expensive luxury, instead of appreciating as an asset, might become trash, like the tequila plant. 

Are we missing that point?

Ask the apparel brand that had truck loads of bell bottom pants stacked in every warehouse the month before that fashion suddenly stopped trending. And yeah, bell bottom trousers may not really ever trend again, just like most old real estate. So much so for the darn cycle theory.

About the author

Rahul Mishra is a real estate professional who started his life as a salesman in the year 2001, selling homes in the city of Kolkata. He worked pan India in real estate organisations like MMG Realty, Bengal Shrachi, The Phoenix Mills and The Space Group before helping co found Pillars with a single objective - To make real estate easy!

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